BirchStreet Insight Post #2: Doing More with Less – Embrace Automation and Go Touchless

According to the American Hotel & Lodging Association’s Front Desk Feedback survey of members conducted between May 12-14, 2020, two out of three hotels in the U.S. are currently operating at less than 50% of pre-COVID staffing levels. While hiring has recently picked up in the U.S. hospitality sector, growing 15% during the three-week period from May 11 to May 31, the net effect is still a dramatic decrease in overall staffing across the industry. Indeed, in the same AHLA survey, 52% of hoteliers said they don’t expect their staffing levels to be fully resorted until at least the end of the year, and 38% said not until after December 31, 2020.

Given diminished staffing levels will continue for the foreseeable future, it is clear that hospitality operators will have to become more efficient through technological transformation to make up for lost labor capacity. As McKinsey wrote during the early days  of the crisis, “for all the uncertainty about what the future will look like, it’s clear already that it will be digital… (and) for many companies, the only option is to accelerate their digital transformation.”

To that end, in consultation with our partners in the hotel, casino, managed food service, and restaurant sectors of hospitality, we have identified five technology initiatives that addresses operational areas ripe for efficiency gains and automation: procurement, invoice processing, vendor payments, inventory management, and storeroom operations. Not only do initiatives in these areas unlock a leaner operating model, touchless digital transformation will contribute to the overall health and safety of staff and guests through a dramatic reduction in paper handling and hand-written approvals. The companies that embrace best practice processes and technology now will reach the ‘next normal’ sooner, and will be better positioned to accelerate out of the downturn and return to profitability.

We will be addressing automation initiatives in two parts: this post will focus on the first three business processes listed above: procurement, invoice processing, and vendor payments, which together make-up the Procure-to-Pay (P2P) process. Our next post will address inventory and storeroom management.  

Procurement:

Whether your company partners with a GPO or manages buying independently, eProcurement software is the foundational building block for supply chain automation. With an eProcurement solution, procurement teams have the visibility and controls necessary to ensure buyers are purchasing the right products from approved vendors at the best possible price. Without eProcurement software, the buying process is opaque, time consuming, and prone to maverick spend. For example, if buyers are empowered to order by phone and don’t need to produce a P.O. before invoices are paid, what’s to prevent them from directing spend to non-approved vendors? Even when buyers are trying to follow corporate purchasing guidelines, the work is highly manual and error prone, and requires juggling spreadsheet after spreadsheet to figure out which vendor is approved and at what rate.

Adopting an eProcurement solution that automates much of the buying processes solves these issues and more by aligning purchasing teams to best practice processes and approval workflows, which cuts down on time spent and paper touched. Furthermore, by aggregating spend across distributed locations into a single system, teams unlock strategic enterprise spend analytics and compliance reporting, have the tools to correct rogue spend, and, ultimately, obtain the data-driven leverage required to negotiate more effectively with suppliers.

The below chart from Ardent Partners illustrates the competitive advantage top-performing procurement teams provide to their organization. For every dollar of enterprise spend, Best-in-Class teams deliver 3.128% savings gain, which is a tremendous impact to the bottom line for businesses of any size.

 

 

Insight: Whether or not you use a GPO, eProcurement technology is the essential building block of effective supply chain management and provides a highly compelling ROI. Empirically, Best-in-Class procurement functions deliver 3.128% savings gain on every dollar of enterprise spend.

Invoice Processing:

Industry surveys show that finance and operations leaders know there are significant efficiencies to be gained from digitizing invoices, but as the hospitality industry was booming for the last decade, back office transformation projects were occasionally put off, based on the outmoded thinking that “We’re far too busy to even contemplate digitizing our invoice management processes.”  Now, smart hoteliers, restaurateurs, and suppliers are recognizing the enormous ROI of automating and digitizing invoice processing, and are capitalizing on the Covid-19 ‘downtime’ to align to best practices. Indeed, as Ardent Partner’s AP Metrics report from March 2020 illustrated, organizations are increasingly viewing AP as a strategic unit rather than a cost center, and recognizing that full P2P automation “can drive tremendous value to the greater organization…top-performing organizations have made P2P automation part of their technological foundation.” 

To illustrate the significant bottom-line cost savings related to invoice processing automation, let’s use as an example a full service 250 room hotel that is managing 6,500 incoming invoices per year. Research firm Sterling Commerce has stated that the cost of processing a single invoice can be up to $30, but assuming a more conservative average cost of $12.50 per invoice, the total cost for processing invoices for our example hotel is $81,250 per year. If this property is part of a management company with 20 similar-sized hotels, the resulting costs comes to an eye-watering $1,625,000. By adopting Best-in-Class tools and aligning to invoice processing best practice, that number can be reduced by 80% or more. Using our example above, that means $68,250 in savings per property, and $1,365,000 across the management company’s portfolio.

 

 

How is this possible? By digitizing the entire P2P process, many labor and time intensive tasks are automated, and better visibility and control also eliminates profitability leakage that occurs through overpayment of invoices. Indeed, Best-in-Class P2P software, coupled with strong corporate leadership, can drive straight-through invoice processing rates to 80%+. That means four out of five invoices do not require any manual intervention by a staff member because the purchase order, invoice, and receiving record all matched within pre-set tolerances on the quantity, price, and other header-level details.

Additionally, by employing an invoice management solution that does the job of digitizing invoices for you, there is no longer a need for property or corporate resources to key-in information and handle large quantities of paper. In this digitized and automated environment, staff only need to review exceptions, and with tools like an automated invoice exception report, they can quickly identify why the documents are not matching, whether it’s because of a price discrepancy, over/under received items, or substitutions. With all these tools in place, time spent processing invoices can be cut from days to hours, and invoice processing costs can conservatively be reduced to $2/invoice. Ultimately, automation in the back-office lowers cost, enables teams to do more with less, and allows resources to focus on the guest experience rather than the unnecessary paperwork of processing AP.

Insight: An average 250 room hotel can realize a $68,250 net cost savings by adopting Best-in-Class invoice automation processes and technology

Payments:

At a time when many of us are not able to go to the office and are wary of handling paper, doing manual check runs can be a logistical nightmare. We’ve heard the horror stories: AP clerks driving to the office to lug home 30 pound Pitney Bowes machines; runners responsible for payments up and quitting during the pandemic, leaving teams scrambling and vendors unpaid; cash flow reports being enormously difficult to pull due to invoice latency and accruals.

When cash is king, adopting Best-in-Class programs to conserve capital is critical. Here’s where modern payment solutions come into play: they solve the above logistical problems while injecting cash back into your business. By partnering with an integrated payments solution provider on a segmentation and communication plan to convert suppliers from high-cost, low-security checks to more advantageous payment types like ACH and vCard, electronic B2B payment solutions can manage the entire payment process regardless of payment type while providing full visibility into the process. These programs support better cash management by:

  • Reducing costs: Vendor enablement team shifts payments away from costly paper checks to low-cost ACH or no-cost vCard. Further adding to the value, with staff reduced at many hotel management companies and resources needed to be reallocated to other activities, the payment process is as easy as dragging and dropping the payment file into the software: no check printing, envelope stuffing, or postage necessary.
  • Increasing revenue: Best-in-class solutions are generally able to convert 20% of vendor spend to vCard; vendors get a more secure, consistent, and convenient form of payment in exchange for paying interchange fees. A portion of these interchange fees are rebated back to the buyer , generating a new revenue stream.
  • Increasing DPOs: Payments module provides better control over payments going out the door with real-time reporting and dashboards that give insight into all spend. Further, top solutions will work with your vendors to extend your payment terms and thereby improve working capital dynamics and enable capture of early payment discounts.

 

Indeed, here are the bottom-line results a typical full service hotel can expect:

 

 

Insight: As one customer of BirchStreet Pay inquired early on: “Wait, so you process all my payments, and then after doing all that work you send us a check?” Yes.

Automating the P2P cycle and aligning to industry best practice has a clear and compelling ROI. Between the reduction in direct cost and the ability to redeploy resources to more strategic initiatives, the case for back office automation in hospitality has never been stronger. Next week, we will focus on the business processes related to inventory and storeroom management. Like P2P, these operations can be made dramatically more efficient and cost-effective through adoption of Best-in-Class tools.

BirchStreet Insight Post #1: Leverage data to position yourself for success

As of late May, nascent recoveries underway in China, Germany, and in certain US drive-to markets have revealed definitive patterns: economy travel will recover more quickly than upscale, travelers will skew younger and will gravitate toward domestic drive-to markets, and destinations with outdoor and nature-related attractions will initially see the strongest demand. Additionally, in conversations with our customers in the managed food service, gaming, and hotel management space, a consensus has formed as to the sequence by which traveler segments are expected to return:

  • Domestic drive-to leisure
  • Distance leisure
  • Business
  • Group events/conferences

While understanding these high-level trends is useful, the above information doesn’t exactly help operators solve dilemmas related to reopening. In this post we will focus on one deceptively simple question: where should management companies be spending their money? With that question in mind, we have analyzed BirchStreet global category spend across six continents, across hotel scales from economy to luxury, and across marketplaces with and without GPO suppliers for the periods of January to April 2019 and January to April 2019. This analysis has yielded what we and our partners consider to be key insights into three critical categories of spend: F&B, CapEx, and IT. We hope our findings will help you spend wisely and accelerate your return to profitability.

Global Food & Beverage Spend for Jan 2020-Apr 2020: Down 93%

BirchStreet F&B spend globally cratered in April, down 93% intra-year from a high in January. While beverage spend initially showed more resilience than food spend, down just 6% in February compared with food’s 40%, beverage ultimately fell further, down 97% versus food’s 92% in April.

Fortunately, preliminary May 2020 for the Americas shows a decided uptick in F&B spend in May, up 14% percentage points from April relative to January’s high. Food appears to be leading beverage in the recovery, perhaps indicating efforts to restock perishable items in advance of increased demand.

Beyond these sobering numbers, some interesting trends have emerged, particularly as it relates to spend concentration and the culling of SKUs. One leading managed food service company that operates F&B-centric venues such as stadiums, parks, and conference centers, told the BirchStreet Customer Advisory Board that as of May, they are no longer carrying 60% of the SKU’s they were carrying in March. This hyper-focused approach to purchasing in the face of uncertain demand accomplishes several goals:

  • First, by reducing the number of SKU’s and menu offerings, the company simplified and streamlined the ingredient prep and cooking process, thereby saving the reduced culinary teams valuable time.
  • Second, by focusing on SKU’s that were largely non-perishable, relatively inexpensive, and historically had high consumption rates, they were able to prevent food waste before it happened and concentrate on higher-margin menus.
  • Finally, by funneling more volume through core SKU’s, they were able to strengthen supplier relationships and negotiate more favorable payment terms.

Because this customer maintained a strict global Item Master within BirchStreet, they were able to quickly consolidate vendors from their central procurement team and push the changes out to their distributed locations, rapidly modifying their spend profile, reducing risk, and lowering costs.

Insight #1: Consider greatly reducing SKUs for F&B items to control costs, improve operational efficiencies, and enhance margins during re-opening.

Global CapEx Spend for Jan 2020-Apr 2020: Down 46%

Down 46% YTD, CapEx was one of the least impacted categories of BirchStreet spend. Those businesses with strong balance sheets are using this ‘pause’ in hospitality travel to focus attention on hotel maintenance and renovations. Improvements are being further influenced by Covid-19, especially in areas where an investment today can have an immediate impact on employee and guest safety.

Indeed, new regulations and concerns around hygiene have forced companies to rework their interiors on the fly: decorative pillows, bed scarves, and other absorptive items are out, as are communal tables, benches, and other design elements meant to foster interpersonal interaction. Easy to clean and disinfect furniture, fixtures, and equipment are high up on procurement team’s lists to source, while at the same time maintaining appropriate design characteristics to fit in with the aesthetics of the property.

Additionally, new categories of spend, like Plexiglas, sneeze-guards, and hard-surface dividers have seen surges in demand. “Transparency and tangible (hygiene) cues will give consumers more comfort,” said Donna Quadri-Felitti, director of the hospitality management school at Pennsylvania State

University. Additionally, outdoor social and dining spaces have taken on new importance and require new capital investments to ensure health and safety measures, while enticing guests back through the doors. Now more than ever, those hotels and restaurants with large indoor and outdoor ‘footprints’ may be in higher demand.

Mr. Russell Kett, Chairman of HVS London comments “Building trust between hotelier and customer will be paramount, with businesses operating and presenting their services in a way that makes the guest, and the staff who take care of them, feel comfortable, confident and protected.”

Insight #2: Spending capital wisely is now more important than ever before. Hotel operations teams need to work closely with finance, owners, and their suppliers to modify properties with appropriate FF&E, while minimizing costly mistakes by limiting unnecessary, perhaps ‘non-returnable’ purchases.

Global IT Spend for Jan 2020-Apr 2020: Down 8%

Down just 8% YTD, IT is by far the least impacted category of BirchStreet spend. Leading brands and management companies have accelerated their digital transformation in the face of COVID, investing not only in the hardware necessary to enable remote working like laptops and monitors, but also in new software systems that will allow them to streamline processes, go touchless, and, ultimately, increase profitability.

One company that is focused on technology innovation in both the front- and back-of-house is Hilton. Hilton has been delivering lead-edge, cloud and app-based technologies for years, from their digital key allowing touchless check-in and check-out for guests, to their Hilton Honor’s App which will form the foundation of their strategy to tempt guests back, in a safe and indeed hospitable way. In a recent Skift interview, Chris Nassetta, CEO of Hilton, said “The core elements of our business…(are not) going to change. Certain mechanical elements of the experience are going to be digitized, but that was happening anyway. It’ll just happen faster.”

Insight #3: Now is the time to thoroughly analyze how investing in proper technology and changing outdated processes and procedures can return your business to profitability faster.

As the data shows, leading hotel management companies are focused on managing their F&B SKUs, investing in appropriate capital improvements, and doubling down on IT, technology, and automation. These areas are undoubtedly going to lead much of the return to profitability. In our next post, we will look deeper into those back-office initiatives that are most important to pursue, and will drive the greatest return to your employees, your guests, and to your owners.

From Reopening to Recovery: BirchStreet’s Hospitality Insight Series

There are staggering metrics coming out of the hospitality industry: hotel occupancy hovering at 20-30%, RevPAR down 75% YTD[i], and more than two in three hotels operating at less than 50 percent of pre-COVID staffing levels[ii]. While the short-term outlook is undeniably formidable, hospitality is showing signs of recovery as countries and states reopen. From China to Germany, Florida to Texas, reopening markets have proved that people’s desire to travel has not disappeared. In fact, in a recent survey, one-third of Americans said they hope to travel within three months after stay-at-home restrictions lift[iii], and in the first weekend after reopening, domestic ‘drive-up’ leisure travel submarkets like Galveston, Texas and Daytona Beach, Florida, saw 25-30% week-over-week occupancy gains[iv]

While recovery is going to be staggered and asymmetric across markets, hospitality companies around the world are facing a similar set of core operational questions as they contemplate reopening: how are we going to keep customers and staff safe, and how are we going to source and procure the PPE and cleaning chemicals necessary to do so? With staffing levels expected to stay low, how are we going to operate efficiently without sacrificing great service to our guests? How do we prepare for a possible ‘second wave’?  And, critically, how do we clamp down on cost and accelerate the return to profitability? 

In an upcoming series of posts, BirchStreet will address three areas that we and our brand and independent management company partners consider central to planning and executing a successful reopening:

  • Aggregating and leveraging procurement data
  • Embracing automation
  • Building flexibility into organization and capacity plans.

Our partners in the hotel, casino, and managed food service space helped shape the vision of this series, and we sincerely thank them for sharing their perspectives. We hope the insights presented will help our industry navigate the current crisis and emerge better prepared for the challenges ahead.

Insight Post #1: Leverage data to position yourself for success

With RevPAR depressed, the pressure from owners on their management companies to contain cost is more intense than ever. Because supply chains have been disrupted and category spend is shifting rapidly, using like-for-like projections of pre-COVID spend to anticipate post-COVID spend is not likely to yield meaningful insights: the categories and items that you spent money on historically are not going to line-up exactly with what you will spend money on moving forward.

In our first blog post in this series, we will use recent BirchStreet data to measure shifts in spend. By analyzing how buyers in reopening markets have adapted to meet the challenges of reopening, we can help you better prepare for volatile demand patterns over the foreseeable future.

Insight Post #2: Embrace automation and become touchless

Broader trends in the industry were already driving companies toward digital transformation initiatives, but post-COVID, tackling automation is no longer a question of ‘if’ but ‘when,’ and increasingly the answer to ‘when’ is ‘now.’ 

Do you know how many AP people you need on-property and at head office processing invoices? If it is no longer prudent to pass pieces of paper around properties for wet signature, what should your new approval process be? What about inventory and stock taking: can you safely use paper to document and authorize requisitions from storeroom to outlets?

Our second blog post will identify operational areas that can be automated, focusing on manual processes that have multiple physical touch-points and unnecessarily bog down valuable resources’ time.

Insight Post #3: Build flexibility into your capability and capacity plans

Recovery is not going to be a straight line. As you think through bringing staff off furlough, are you retooling your organization to be more automated and agile, and your workforce more flexible? With unpredictable demand and the possibility of lockdowns being reinstated market-by-market, transitioning from fixed to variable costs wherever possible is paramount. How will you flex costs based upon your forecasted occupancy levels?

Our final post will help you right-size operations and ensure your organization is ready for what comes next.

Editor’s Note: Please feel free to contact us for a personalized session to discuss how BirchStreet can help your business emerge successfully by controlling costs and improving operational efficiencies.  www.birchstreet.net  

[i] https://str.com/press-release/str-us-hotel-results-week-ending-9-may [ii]https://lodgingmagazine.com/survey-most-ahla-members-expect-hotel-staffing-levels-to-remain-low-through-2020/ [iii]https://skift.com/2020/04/21/a-third-of-americans-want-to-travel-again-shortly-after-pandemic-is-contained-skift-researchs-latest-travel-tracker/ [iv]https://str.com/press-release/str-florida-texas-lead-weekend-hotel-occupancy-gains

Implications of the New CARES Act for Hotel Management Companies

We’re not lawyers and none of the details below should be construed as legal advice. However, we have kept our finger on the pulse of the hospitality industry in order to help our customers. Specifically, we have tracked the government’s response to the coronavirus pandemic and its impact on the industry. The CARES Act, signed into law on March 27, has specific language around hotels and restaurants that may be helpful to operators. However, the bill is hundreds of pages and many of the finer points are buried. Further, those points are often open to interpretation. Our perspective is that there may be relief for many companies in the hospitality industry, and we would encourage those companies to move quickly to determine their eligibility for benefits.

CONTEXT

The coronavirus pandemic has had an unforeseen and unprecedented impact on the US economy. For the week ending March 21, 3.3 million Americans filed for unemployment benefits. For the week ending March 28, that number was 6.6 million, nearly 10x the previous high in 1982. The hospitality industry has been especially hard-hit. CBRE expects RevPAR to decline 37% in 2020, with a contraction of more than 60% in Q2. The National Restaurant Industry anticipates losing $225 billion due to the COVID-19 crisis. Put simply, our customers will be among some of the hardest hit.

To support the hospitality industry and the economy more broadly, the CARES Act includes programs to support individual businesses. The most interesting – the $349 billion Paycheck Protection Program (or PPP) – may provide cash relief to hotels and restaurants in the form of a favorable loan. High-level details are below:

PPP LOAN OVERVIEW:

The CARES Act amends Section 7(a) of the Small Business Act to add a Paycheck Protection Program. This program provides perhaps the greatest amount of relief to hotels and restaurants. In particular, the PPP provides a loan amount equal to 2.5x the average monthly payments for payroll costs during the one-year period before the date on which the loan is made or $10 million, whichever is less. There are detailed definitions of payroll costs that applicants would need to review.

PPP Loan Terms, Use of Proceeds, and Forgiveness
  • There are no fees, prepayment penalties, personal guarantees, collateral requirements, credit elsewhere or personal resources tests required. Interest rates are capped at 4%, and the term is ten years with no payments for the first 6-12 months.
  • Proceeds of the loan can be used for payroll costs, rent, utilities, certain group healthcare benefits, and interest on any debt including mortgages.
  • While the details around loan forgiveness is complex, the loan may be fully forgiven if funds are spent on the categories listed above. However, at least 75% of the funds must be used for payroll, and employers must maintain employees (or quickly rehire) while maintaining compensation levels.
Eligibility and NAICS Code 72 Exception

Businesses with up to 500 employees are eligible for the program, which on the surface may not help many larger management companies. However, there is an exception for businesses within NAICS designation 72, or the Accommodation and Food Services sector. If there are less than 500 employees per location, each individual location may be eligible for the loan.

Who Can Provide PPP Loans?

You can apply starting April 3 through SBA-approved 7(a) lenders.

Other Options

While the PPP is potentially the most advantageous form of relief, the Payroll Tax Credit and Employee Retention Tax Credit are two other options that might be available to you. These can be used in place of PPP loans and not in addition to them.

Next Steps

As mentioned, BirchStreet is not providing any legal advice. We are simply trying to raise awareness about options that can help hospitality businesses.

That said, we do have two recommendations:

  • First, seek legal and financial counsel with respect to the decisions you make for your business
  • Second, seek that counsel ASAP, since applications open this week, and there be no shortage of demand given the current environment